Finance Tax Time

Primary residence buyers and sellers understand the fundamental tax benefits of owning a home. Many though aren’t aware beyond the typical deductions of mortgage interest and real estate taxes what and when other home buying or selling expenses can be deducted. The second step in determining the timeline for claiming an expense is separating deductions that can be taken now or costs that must be deferred that are considered part of the basis of owning a home.

-Basis is the starting cost for figuring a gain or loss when you sell your home. This starting cost is also used to determine depreciation if you use part of your home for business. Basis must be fair market value. Certain costs can be added to your basis or subtracted, which are called adjustments. Increases to adjustments are: putting an addition on your home, paving a driveway or installing central air-conditioning. Decreases to adjustments are: Casualty loss not covered by insurance, payments received for an easement granted, or depreciation if home is used for business or rental.

If you sold a home in 2005 the first step in deciding which column a home buying or selling expense goes under is to take a good look at the RESPA or Real Estate Settlement Proceedures Act form you received at closing or escrow. Take your RESPA and other home buying or selling expenses that you feel might apply to an experienced tax accountant, so they can organize and separate deductions from costs and eliminate non-deductible items. Deferred costs that figure into the basis of a home benefit sellers in the tax year they sold. Some of the out of pocket costs incurred by buyers in the purchase of a home might have to be delayed, which can come as a surprise to buyers.

To claim deductions you must itemize on Schedule A form 1040 and under IRS rules if you itemize you can’t claim the standard deduction. To see more tax information for first-time homeowners pick up Internal Revenue Form 530 for 2005. Many deductions or costs have exceptions that you must meet to claim a deduction or cost basis expense. Here are some basic guidelines that buyers and sellers should be familiar with before entering a contract to purchase or sell a home.

Deductions

-Mortgage interest. Your main or a second home must secure mortgages.

-Late payment charges on a mortgage. Only deductible if it wasn’t for a specific service in connection with your loan.

-Mortgage prepayment penalties. Only deductible if it wasn’t for a specific service in connection with your loan.

-Real estate taxes. Property taxes actually paid in the tax year.

-Home improvement, mortgage and refinancing loan origination points. You must meet set guidelines or spread costs over life of the mortgage.

Costs

-Transfer taxes. State, county or local. Charges you paid charged by governments when a home is bought or sold.

-Owner’s title insurance.

-Recording fees. Fees charge by governments to have mortgages, satisfactions, deeds and other legal documents registered into databases.

-Legal and Abstract fees.

-Property surveys.

-Real estate brokerage commissions.

-Local assessments that increase the value of your property. New sidewalks, streets, sewer and water systems are costs.

-Special homeowners association condominium assessments that cover capital improvements such as a new roof, not roof repairs.

-Charges for installing utility services for new construction.

Don’t plan on taking as a cost or deduction.

-Mortgage principal payments.

-Mortgage insurance premiums.

-FHA and VA funding fees.

-Credit report fees.

-Loan application fees.

-Loan assumption fees.

-Notary fees.

-Mortgage note preparation costs.

-Appraisal fees by mortgage lender.

-Home inspections.

-Moving costs. Unless you relocated to a new job, restrictions apply.

-Cleaning costs when moving in or out of a home.

-Condominium homeowner association assessments.

-Condominium homeowner association application, move-in and move-out fees.

-Rent for occupancy before closing.

-Homeowner’s insurance premiums.

-Wages for household help.

-Depreciation.

-Contributions to a tax escrow accounts that were not paid to a taxing authority.

-The cost of cable-TV, electricity, gas, telephone or water.

-Charges for services such as trash collection or periodic service charges for lawn mowing or snow shoveling when in violation of local ordinances.

-Repairs. An expense that keeps your home in ordinary and efficient operating condition such as fixing gutters leaks, broken windows and cracked drywall.

-Gifts to buyers or sellers such as flowers, gift baskets or entertainment.

-Your own labor for an improvement. An improvement is based on the actual costs of material labor except your own.

Cooperatives offer many tax benefits for homeowners, but they do have special tax rules. Consult a qualified tax accountant who specializes in cooperatives.

The IRS requires that you keep records that affect the basis cost and deductions until the limitations for income tax returns expires, typically a set period of time after you sell your home.

Mark Nash’s fourth real estate book, “1001 Tips for Buying and Selling a Home” (2005), and working as a real estate broker in Chicago are the foundation for his consumer-centric real estate perspective which has been featured on ABC-TV,CBS The Early Show, Bloomberg TV, CNN-TV, Chicago Sun Times & Tribune, Fidelity Investor’s Weekly, Dow Jones Market Watch, MSNBC.com, The New York Times, Realty Times, Universal Press Syndicate and USA Today.

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Tips That Make Tax Season Easier

April 15 is not that far away, time to gather your receipts, pay stubs, bills and W2 forms. As the tax return filing stealthily approaches, anxiety over filing our taxes is a certainty in all our lives.Get this years papers in order before you are looking at next year. Here is my annual list of ten tips to alleviate these tax time headaches.

1. Create a Checklist: Make a list of everything you need to effectively complete your taxes. Your list should consist of such categories as deductions, business expenses, receipts, W2 forms and any changes made in the tax code from the previous year. Make sure it reflects your spending habits .

2. Begin Tax Preparation Early: At the beginning of each new year, get an expandable folder. Label each pocket according to what is in it - receipts, W2s, pay stubs, business expenses, home expenses and other important documents. Pendaflex has a great solution with their Tax Box, it is a perfect tool for filing your tax time records since it comes complete with hanging folders, file folders, index cards, check file and a project organizer inside it’s own plastic box.

3. Sort as You Go: File your papers in their respective pockets as you get them. If you organize your papers as you go, the task of doing your taxes will be much simpler. If everything is in its respective pocket, everything will be where you need it when April rolls around .

4. Remember Real Estate: Keep all statements from the county or state, and all cancelled checks for real estate taxes in a separate folder pocket I recommend keeping all statements that the bank sends to you at the end of the year together with any statements of mortgage interest or real estate taxes they may pay for you in one folder, and label it Real Estate. If you closed on a house in the past year you would want to keep any papers or receipts with regard to mortgage, interest, points etc. in the same pocket .

5. Keep a Business Diary: Keep written documentation of all of your business costs. A great suggestion write all of your business expenses in a small notebook. At the end of the year, put it in the pocket with your business receipts. This will make the task of auditing your business trouble-free.

6. Journal Home Office Expenses: If you have a home office, keep track of all expenses related to this office office. This journal of expenses should be separate from your other business expenses, and should include telephone, fax, heat and electricity costs .

7. Keep Track of Charity: Keep all of your receipts together from any charitable contributions during the year Designate a separate folder pocket in your expandable file or file drawer for charitable contributions and string all receipts from fund-raising activities, youth groups, religious organizations, financial donations or clothing donations.

8. Take Advantage of Resources: The IRS web site provides forms, instructions and other materials. There is nothing more exasperating than having completed your entire return except for that one form that you forgot at the office , so using this resource can be helpful in retrieving needed forms . Taxpayers can access forms, instructions and other materials using the IRS’ own web site at www.irs.ustreas.gov.

9. Consider Filing Electronically. Electronic filings are becoming more popular as taxpayers become more comfortable using the Internet. It is less likely that your return will be lost or replaced when you file electronically, and your paperwork is significantly cut down. Additionally, taxpayers who are due tax refunds from the IRS will generally get their refund checks sooner using electronic filing.

10. Store for Future Reference: After filing your taxes, keep a copy in the folder with the receipts, W2s and other important documents. Shut the folder and keep it in a safe place. If in the future you need to refer back to your tax returns, everything you’ll need will be at your fingertips .

Keeping your financial documents in good order throughout the year will make filing your taxes much easier and less stressful.

Sharon Mann is an organizational expert for Pendaflex the world’s leading maker of innovative organizing products and solutions. Sharon also serves as president of the Pendaflex

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1. Do keep good records of your expenditures.

2. Do keep your receipts, even if its in a shoe box. Its better to have the backup in case IRS ask questions.

3. If you are in business and you need to purchase equipment for your business, do so, and ask your Tax Professional to 179 the property. (The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased )- In 2006, a business can expense $108,000 in capital expenditures.

To qualify for the section 179 deduction, your property must meet all the following requirements.

* It must be eligible property.
* It must be acquired for business use.

* It must have been acquired by purchase.

4. Do not over estimate expenses that you don’t have receipts for.

5. Do not round you number off to $50, $100, $150 $200 - allow your numbers to be “real” $51, $108, $148, $203, etc.

6. Do attach an explanation if you have an extremely large deduction.

7. Don’t try and force the software if your e-file won’t go through - take your return to a Tax Professional. There is a reason the e-file didn’t go through.

8. Do file your taxes before April 15. Extensions give IRS more time to review your return since it is not filed during the season rush.

9. Do sign and date your return. You would be surprised at how many people forget to sign and date their return.

10. Do not take the home office expenses unless you know what you are doing, especially if you are planning on selling your home in the next 3 to 5 years.

Tags: 179, capital expenditures, lower, record keeping, savings, taxes, tips179, capital expenditures, lower, record keeping, savings, taxes, tips

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